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Rate Watch

Mortgage rates fall, as Fannie and Freddie’s future becomes gloomy

Last week, the big question for Mortgage rates was the big question for the whole global economy. What’s going on with Fannie Mae and Freddie Mac? Rumors swirled regarding the health of these two mortgage market behemoths, and they appear to be on life support. Fannie and Freddie Mac collateralize and guarantee over $5 trillion in mortgage debt. The prospects of their failure left a lot of uncertainty in the market. If these two companies fail, mortgage financing would slow to a crawl. Together, these two entities represent 40% of the residential mortgage market.

Last night, the Federal Reserve and the Treasury Department released a plan to prop up the struggling GSEs. First, the Treasury department will grant the two entities a temporary increase in their lines of credit with the US Treasury. Second, the plan will give the Treasury temporary authority to purchase stock in the two companies, if need. And lastly, the plan will allow the Federal Reserve to lend to the GSEs should they require it. As of the writing of this newsletter, the stock market has not reacted favorably to the plan.

Since the Fannie Mae and Freddie Mac fears came into focus, the stock market has taken a beating and new predictions of recession have entered economic outlooks. This has really helped to push mortgage rates lower. Bankrate.com’s overnight average on the 30-year fixed rate mortgage has fallen to 6.09%, down from last Monday’s 6.26%. Other products have followed. The 15-year fixed rate mortgage fell to 5.63%, and the average on the 5-year Adjustable Rate mortgage dropped to 5.51%, down from last week’s 5.78%.

This week’s economic calendar is stock full of data and economic events. On Tuesday, Fed Chairman Ben Bernanke will begin a two day testimony to the Senate Banking Committee. The Fed Chairman can expect to be grilled on the problems with Fannie and Freddie and his words may have some impact on the markets. On Tuesday and Wednesday, two big inflation reports will be released, the Producer Price Index (PPI) and the Consumer Price Index (CPI). PPI measures wholesale inflation, while CPI concentrates on inflation in consumer goods. Inflation has been a big area of concern for a number of weeks.

It will also be important to watch Tuesday’s Retail Sales report, Wednesday’s Industrial Production report, and Thursday’s Housing Starts report. All of these reports could have an impact on mortgage rates.

posted by Vincent Biondillo @ 3:33 PM